VST Industries Ltd., Hyderabad V. ACIT, Hyderabad

ITA 691/HYD/2005

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 3074 (ITAT-HYDERABAD)
• Duration Of Justice: 5 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 01-07-2010
• Assessment Year: 2000-2001
• Appeal Filed On: 09-06-2005
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VASUNDHARA SINHA
• Assessee Lawyers: T S AJAY
• Keywords: Capital asset; Business income; Business expenditure; Wholly owned subsidiary; Bad and doubtful debts; Valuation report
• Section: 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER ITA NO.691/HYD/2005 ASSTT. YEAR : 2000-2001 VST INDUSTRIES LTD., HYDERABAD PAN AAACV6799C VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 3(4), HYDERABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI T.S.AJAY, CA RESPONDENT BY : SMT.VASUNDHARA SINHA, CIT-DR O R D E R PER CHANDRA POOJARI , ACCOUNTANT MEMBER: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE CIT(A) IV, HYDERABAD DT.24-3-2005 FOR ASSESSMENT YEAR 20 00-01. 2. THE FIRST GROUND RAISED BY THE ASSESSEE IS THAT THE CI T(A) ERRED IN CONFIRMING THE DISALLOWANCE OF THE CLAIM OF TH E ASSESSEE, AS LONG TERM CAPITAL LOSS OF RS.13,96,22,585, ARISING OUT OF THE SALE OF SHARES HELD BY IT IN VST-NPL TO M/S GLOBAL GREEN COMPA NY LTD. (GGCL FOR SHORT) AND INSTEAD DIRECTING THAT THE LOSS IS TO BE CO MPUTED U/S 50B OF THE INCOME TAX ACT, 1961 (THE ACT), AS SLUMP SALE. 3. BRIEF FACTS OF THE CASE ARE THAT IT WAS NOTICED BY TH E ASSESSING OFFICER THAT THE ASSESSEE COMPANY MADE INVESTMENT IN A SUBSIDIARY COMPANY ACQUIRING 39.90 LAKHS SHARES. THE ASSESSEE COMPANY HELD 99.75 PER CENT OF THE SHARES ISSUED BY THE SU BSIDIARY ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 2 COMPANY AND HENCE WAS HOLDING CONTROLLING INTEREST THERE ON. THE ASSESSEE COMPANY SOLD THE SUBSIDIARY COMPANY TO M/S GGCL FO R A CONSIDERATION OF RS.15.50 CRORES. AN AGREEMENT WAS ENTER ED INTO TO THIS EFFECT ON 23-11-1999. THE ASSESSEE COMPANY ALSO PASSED A BO ARD RESOLUTION, WHEREIN THE MODALITIES OF THE TRANSFER WE RE DISCUSSED. THE DETAILS OF THE RESOLUTION ARE NOTED BY THE ASSESSING OFFI CER AT PAGE 11 OF HIS ORDER. IT WAS ALSO NOTICED BY THE ASSESSING OFFICER THA T AN ANNEXURE WAS ATTACHED TO THE AGREEMENT WHEREIN THE BALANCE SHEE T AS ON 1-12- 1999 WAS RECONSTRUCTED. THE PROPOSED BALANCE SHEET IS EXT RACTED AT PAGE 12 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER NOTI CED THAT THE ASSESSEE COMPANY ENTERED INTO A SUPPLEMENTARY AGREEMENT O N 24-12- 1999 MAKING A MINOR VARIATION IN THE PROPOSED BALANC E SHEET. THE ASSESSING OFFICER HELD THAT THE ASSESSEE COMPANY ENTERED INT O A PACKAGE DEAL TO TRANSFER THE SUBSIDIARY COMPANY VST NP L TO GGCL FOR A LUMP SUM CONSIDERATION. THE ASSESSING OFFICER HELD THA T THE ASSESSEE COMPANY TRANSFERRED THE SHARES HELD IN THE SUBSIDIARY COMP ANY TO M/S GGCL AS PER THE CONDITIONS MUTUALLY AGREED UPON. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE COMPANY SOLD THE SHARES FOR A CON SIDERATION OF RS.15.50 CRORES AND INCURRED A LOSS. THE ASSESSING OFFICE R CONSIDERED THE ISSUE WHETHER THE LOSS IS TO BE COMPUTED AS A CAPITAL LOSS OR LOSS ASSESSABLE U/S 45 OF THE ACT. THE ASSESSING OFFICER HELD THAT THE ASSESSEE COMPANY PASSED A RESOLUTION ON 27-5-1999 WHEREIN I T WAS NOTED THAT THE AMOUNT OF RS.38.46 CRORES OWED BY THE SU BSIDIARY COMPANY IS TREATED AS NOT PAYABLE. THE RESOLUTION IS EX TRACTED AT PAGE13 OF THE ASSESSMENT ORDER. THE ASSESSING OFFICER HELD T HAT IN THE PROCESS OF RECONSTRUCTING THE BALANCE SHEET AS ON 31-3-1999 AND TRANSFERRING THE SUBSIDIARY COMPANY THE ASSESSEE COMPANY CHOSE TO FOREGO THE AMOUNT DUE TO THEM FROM VST NPL. THE ASSE SSING OFFICER OBSERVED THAT THE LOSS INCURRED BY THE ASSESSEE IN THE PROCE SS OF SALE OF THE TRANSACTION IS NOTHING BUT LOSS OF CAPITAL INVESTED IN THE SUBSIDIARY ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 3 COMPANY. THE ASSESSING OFFICER REJECTED THE ASSESSEES CONTENT ION THAT THE LONG-TERM CAPITAL LOSS IS INCURRED IN THE COURSE OF TH E TRANSACTION. ON APPEAL, THE CIT(A) HELD THAT THE TRANSFER OF SUBSID IARY COMPANY EFFECTED BY ASSESEE THE CAPITAL GAINS REQUIRED TO BE COMP UTED AS PER SPECIAL PROVISIONS VIZ., SEC.50BOF THE ACT. ACCORDINGLY, H E DIRECTED THE ASSESSING OFFICER TO COMPUTE THE CAPITAL GAIN U/S 50B OF TH E ACT. HE REJECTED THE CLAIM OF THE ASSESSEE REGARDING THE ALLOWANCE OF THE AMOUNT COMPUTED AT RS.13.96 CRORES AS CAPITAL LOSS. ACCORD ING TO THE CIT(A), THE IMPUGNED TRANSACTION IS NOTHING BUT A SLUMP SALE AND CAPITAL GAIN IS REQUIRED TO BE COMPUTED U/S 50B OF THE ACT. AGAINST THIS DISALLOWANCE, THE ASSESEE IS IN APPEAL BEFORE US. 4. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT TH ERE IS NO SALE OF UNDERTAKING AS ENUMERATED IN SEC.50B OF THE ACT. THERE IS NO SLUMP SALE EITHER. THE INTENTION OF THE ASSESEE IS TO JU ST SELL ALL SHARES OF NPL. THE ASSESSEE HELD THE SHARES IN NPL WHICH WERE SOL D TO M/S GGCL VIDE AGREEMENT DT.23-11-1999 AND 24-12-1999. THE TRANSACTION CONSTITUTES A TRANSFER U/S 2(47) OF THE ACT AND THE CONSEQ UENT PROFIT OR LOSS HAS TO BE COMPUTED UNDER THE PROVISIONS OF SEC. 45 OF THE ACT. THE ASSESSING OFFICERS CONTENTION THAT THE SAME IS A CAPITAL R ECEIPT IS TOTALLY INCORRECT AND IS NOT BASED UPON ANY PROVISIONS OF THE ACT. THE LOSS ARISING OUT OF THIS TRANSACTION IS GOVERNED BY THE PROVI SIONS OF SEC.45 OF THE ACT AND IT IS A CAPITAL LOSS TO BE ALLOWED. THE LE ARNED COUNSEL FOR THE ASSESSEE WITH DUE RESPECT TO THE LOWER AUTHORITIES, SUBMITT ED THAT THE LOWER AUTHORITIES TOTALLY MISUNDERSTOOD THE FACTS OF T HE CASE. ACCORDING TO HIM, THE INTENTION OF THE PARTIES IS TO BE SEEN AND IN THE PRESENT CASE, THE INTENTION IS ONLY TO SELL THE SHARES AND THERE IS NO MEANING IN CALLING THE SAME AS PACKAGE DEAL BY THE LOWER AUTHORITIES. HE DREW OUR ATTENTION TO THE IMPUGNED AGREEMENT OF SALE ENTERED INTO BETWEEN THE PARTIES ON 23-11-1999 AND ALSO DREW OUR ATTENTION TO THE SUPPLEMENT ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 4 AGREEMENT DT.24-12-1999 AND SUBMITTED THAT THE AGREE MENT ITSELF SHOWS THAT THE ASSESSEE SHALL TRANSFER AND CONVEY THE LEGAL TITLE OF THE PURCHASED SHARES OF THE COMPANY AS ON THE DATE OF TRANSFER AND WHEREUPON THE PURCHASER SHALL PAY THE TOTAL CONSIDERATI ON OF RS.15.50 CRORES TO THE SELLER IN CONSIDERATION OF SUCH TRANSFER OF SH ARES IN THE MANNER DESCRIBED IN THE AGREEMENT. HE SUBMITTED THAT B Y NO STRETCH OF IMAGINATION IT CAN BE CALLED AS TRANSFER OF THE UNDERTA KING OR SLUMP SALE AND DISALLOW THE CLAIM OF THE ASSESSEE AS CAPITAL LOSS. 5. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THIS IMPUGNED TRANSACTION IS NOTHING BUT TRANSFER OF THE UNDERTAKING AS A WHOLE, AS ENUMERATED IN THE PROVISION S OF SEC.50B OF THE ACT AND IT IS NOT ONLY TRANSFER OF SHARES BUT ALSO TR ANSFER OF THE UNDERTAKING ITSELF. BY ENTERING INTO THE AGREEMENT DT.23-11-1999, THE ASSESSEE TRANSFERRED ALL THE ASSETS AND LIABILITIES OF THE SU BSIDIARY COMPANY (VST NPL) TO GGCL. IT IS NOTHING BUT A PACKAG E DEAL. THE PURCHASER IS NOT ONLY INTENDED TO PURCHASE ONLY THE SHA RES BUT ALSO THE UNDERTAKING AS A WHOLE FOR WHICH PURPOSE IT HAD ENTERE D INTO AN AGREEMENT. IF THE PURCHASER WANTED TO PURCHASE THE SHAR ES ALONE OR TO PURCHASE CLEAR COMPANY, WHAT IS THE NECESSITY OF THIS AGREEM ENT ? SHE DREW SUPPORT FROM THE JUDGEMENT IN THE CASE OF CIT V.S HRI B.C.SRINIVASA SETTY 128 ITR 294 (SC) AND SUBMITTED THAT ASSETS TRANSFE RRED CANNOT BE CONSTRUED AS A CAPITAL ASSET WITHIN THE CONTEMPLATION OF SEC.45 AND IT FALLS U/S 50B OF THE I.T.ACT. FURTHER, SHE SUBMIT TED THAT THERE IS NO MATERIAL ON RECORD TO SHOW THAT THERE IS ITEM WISE VALU ATION. IT IS A CLEAR CASE OF SLUMP SALE AND SEC.50B OF THE ACT IS CLEARLY AP PLICABLE TO THE FACTS OF THE PRESENT CASE ON HAND. ALTERNATIVELY, SH E SUBMITTED THAT IF THE PROVISIONS OF SEC.50B ARE NOT APPLICABLE AND THE N THE COMPUTATION PROVISIONS FAIL, THE ASSESSEE CANNOT COMPUTE CAPITAL LOSS. SH E DREW OUR ATTENTION TO THE VARIOUS PARTIES (1 TO 9) INVOLVED IN THE IMPUGNED ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 5 AGREEMENT. SHE SUBMITTED THAT WHAT IS THE NECESSITY OF INVOLVING VARIOUS PARTIES TO THE AGREEMENT WHEN IT IS JUST SALE OF SHARES. FURTHER, SHE SUBMITTED THAT AS PER THE AGREEMENT, THE PRINCIPAL SELLER UNDERTAKES THAT ALL OUTSTANDING LIABILITIES OF THE COMPANY AND TA XES INCLUDING WITHOUT LIMITATION INCOME TAX, PENALTIES, INTEREST, CHA RGES, DUES AND LEVIES OF WHATSOEVER NATURE LEVIABALE AND ALL CLAIMS, CHARGES, PENALTIES, INTEREST ETC., LEVIED ON THE COMPANY ON ACCOUNT OF CLAIMS BY CUSTOMERS OR ON ACCOUNT OF QUALITY OF THE COMPANYS PRODUCTS, PERT AINING TO THE PERIOD PRIOR TO THE DATE OF TRANSFER, SUCH CLAIMS ARISING BEFORE OR AFTER SUCH DATE, SHALL BE BORNE BY THE PRINCIPAL SELLER AND T HE PRINCIPAL SELLER UNDERTAKES TO INDEMNIFY THE COMPANY AS WELL THE PURCHA SER IN THIS REGARD. THE PRINCIPAL SELLER SHALL BEAR, PAY, DISCHARGE AND SETTLE ALL LIABILITIES DISCLOSED OR UNDISCLOSED, TAXES, INTEREST, CHA RGES, DUES, LEVIES OR ANY CLAIMS TOWARDS THE DIVIDENDS ON THE CUMULATIVE P REFERENCE SHARES OR ANY OTHER LIABILITY OF WHATSOEVER NATURE LEV IED ON THE COMPANY FOR THE PERIOD PRIOR TO THE DATE OF TRANSFER, WHICH H AS COME TO THE KNOWLEDGE OF THE PURCHASER AFTER THE DATE OF TRANSFER , INCLUDING ANY RETROSPECTIVE ORDERS AND THE PRINCIPAL SELLER UNDERTAKE S TO INDEMNIFY THE COMPANY AS WELL AS THE PURCHASER IN THIS REGARD. SHE D REW OUR ATTENTION TO CLAUSES III AND IV OF THE AGREEMENT DT. 23-11-1999, AVAILABLE IN THE PAPER BOOK AT PAGE NOS. 28 TO 57, W HEREIN IT WAS STATED AS FOLLOWS. I) THE OBLIGATIONS OF THE SELLERS TO COMPLETE THE SALE O F THE PURCHASED SHARES UNDER THIS AGREEMENT SHALL BE SUBJECT TO THE SATISF ACTION OF OR COMPLIANCE WITH, AT OR BEFORE THE DATE OF TRANSFER, EA CH OF THE FOLLOWING CONDITIONS PRECEDENT, ANY ONE OR MORE OF WHICH MAYBE WA IVED BY THE PURCHASER IN ITS SOLE DISCRETION. ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 6 II) BOARD RESOLUTIONS: THAT THE SELLERS AND/OR THE COMPANY AS THE CASE MAY BE, HAVE PASSED THE REQUISITE BOARD RESOLUTIONS IN RESPECT OF THE FOLLOWING: A). DETAILING THE SCHEME OF ENTRIES TO ARRIVE AT THE B ALANCE OF ASSETS AND LIABILITIES AS REFLECTED IN THE PROPOSED OR PROJECTED BA LANCE SHEET OF THE COMPANY AS ANNEXED HERETO AS ANNEXURE III. B) WAIVER OF ALL LIABILITIES OF THE COMPANY TOWARDS TH E PRINCIPAL SELLER. C) WAIVER OF INTEREST ON ADVANCES DUE TO THE PRINCIPAL SE LLER BY THE COMPANY. III) VALUATION- THE PRINCIPAL SELLER SHALL HAVE PROVID ED TO THE PURCHASER A VALUATION REPORT OF THE FIXED ASSETS OF THE COMPANY, CO NDUCTED AND PREPARED BY AN INDEPENDENT VALUER. IV) TRANSFER OF OTHER ASSETS: THE PRINCIPAL SELLER SHALL HAVE TRANSFERRED AND CONVEYED OR SHALL HAVE CAUSED TO CONVEY AND TRANSFER IN THE NAME OF THE COMPANY, ALL THE COMPUTERS AND THE CAR WHICH ARE BEING USED BY THE COMPANY. V)FIXED ASSETS AND INVENTORY: AS ON THE CLOSING DATE, THE COMPANY SHALL BE IN POSSESSION OF SUCH OF THE FIXED ASSETS AND THE INVENT ORY OF RAW MATERIALS, WORK-IN-PROGRESS AND FINISHED GOODS, STORES AN D SPARES, PROCESSING AND PACKING MATERIALS, AS SPECIFIED IN THE LIS T OF FIXED ASSETS AND INVENTORY AS REFLECTED IN THE BALANCE SHEET OF THE COMPANY AS AAT THE CLOSING DATE AND ALSO AS PER THE SCHEDULE OF INVESTMEN T IN FIXED ASSETS. VI) PAYMENT TOWARDS LIABILITY: THE PRINCIPAL SELLER SHA LL HAVE MADE ALL PAYMENTS DUE TOWARDS THE LIABILITY TO THE BANK OF BA HRAIN AND KUWAIT AND TO OTHER CREDITORS OF THE COMPANY SECURED AND UNSECUR ED, AND SHALL HAVE OBTAINED DISCHARGE LETTERS FROM SUCH CREDITORS AND FURTHER SHALL HAVE FILED THE RELEVANT DOCUMENTS WITH THE REGISTRAR O F COMPANIES IN THIS REGARD, WITHIN A WEEK FROM THE DATE OF TRANSFER. ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 7 VII) TRANSFER OF CURRENT ASSETS: THE COMPANY SHALL HAVE TR ANSFERRED TO THE PRINCIPAL SELLER THE CASH AND BANK BALANCES, SUNDRY DE BTORS AND OTHER CURRENT ASSETS EXCEPT DEPOSITS WITH THE GOVERNMENT AUTHORITIES. 6. FURTHER, SHE SUBMITTED THAT FROM THE ABOVE CLAUSES, IT IS CLEAR THAT THE INTENTION OF THE PARTIES TO THE AGREEMENT, IS TO TRANSFER THE ENTIRE UNDERTAKING TO THE PURCHASER AS A WHOLE AND NOT SALE OF SHARES ALONE AND THUS THE PROVISIONS OF SEC.50B ARE APPLICABLE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MAT ERIAL ON RECORD. FIRST OF ALL IT IS TO BE SEEN WHAT A SLUMP SAL E IS ALL ABOUT. SEC.2(42C) OF THE I.T.ACT, WHICH IS APPLICABLE FROM 1-4 -2000, DEFINES SLUMP SALE TO MEAN THE TRANSFER OF ONE OR MORE UNDER TAKINGS AS A RESULT OF SALE FOR A LUMP SUM CONSIDERATION, WITHOUT VA LUES BEING ASSIGNED TO THE ASSETS AND LIABILITIES OF SUCH A SALE. IN OTHER WORDS, IF AN UNDERTAKING IS TRANSFERRED AS A GOING CONCERN WITH ALL I TS ASSETS AND LIABILITIES, WITHOUT VALUATIONS HAVING BEEN ASSIGNED TO INDIVIDUAL ASSETS OF SUCH A TRANSACTION IS TO BE REGARDED AS A SLUMP SALE. AS PER EXPLANATION 1 TO SEC.2(42C) OF THE ACT, UNDERTAKING SHALL HAVE THE MEANING ASSIGNED TO IT IN EXPLANATION 1 TO SEC.2(19AA) OF THE ACT. EXPLANATION 1 TO SEC.(19AA) SAYS THAT EXPLANATION 1 TO SEC.(19AA) UNDERTAKING SHALL INCLUDE ANY PART OF THE UNDERTAKI NG OR A UNIT OR DIVISION OF AN UNDERTAKING OR A BUSINESS ACTIVITY TAKE N AS A WHOLE, BUT DOES NOT INCLUDE INDIVIDUAL ASSETS OR LIABILITIES OR ANY COMBINATION THEREOF NOT CONSTITUTING AS BUSINESS ACTIVITY. FROM THIS, IT IS CLEAR WHERE THE ASSETS AND LIABILITIES OF AN UNDERTAKING ARE SOLD AS A GROUP OR LUMPED TOGETHER, SUCH A SALE WOULD QUALIFY AS A SLUMP SA LE. IN THE LIGHT OF THE ABOVE, WE HAVE CAREFULLY GONE THROUGH THE MAT ERIAL ON RECORD AND WE HAVE CAREFULLY GONE THROUGH THE AGREEMENT ENT ERED INTO BY THE PARTIES ON 23-11-1999, WHICH IS PLACED ON RECORD. BY TH IS AGREEMENT, ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 8 THOUGH THE ASSESSEE TRANSFERRED AND CONVEYED THE LEGAL T ITLE OF THE SHARES TO THE PURCHASER FOR A CONSIDERATION OF RS.15.50 CR ORES BY TRANSFER OF THE SHARES TO GGCL, ACTUALLY THE ASSESSEE TRAN SFERRED THE ENTIRE UNDERTAKING I.E. SUBSIDIARY COMPANY I.E. VST NPL TO GGCL. ON THE TRANSFER OF SHARES, ALL OUTSTANDING LIABILITIES OF T HE TRANSFERRED COMPANY AND TAXES INCLUDING WITHOUT LIMITATION INCOME T AX, AS STATED IN CLAUSES III AND IV OF THE IMPUGNED AGREEMENT DATED 23. 11.1999, IT IS NOT ONLY TRANSFER OF SHARES BUT TRANSFER OF THE ENTIRE UNDERTAKING TO GGCL. ON CONSIDERATION OF VARIOUS STIPULATIONS AND PROV ISIONS STATED THEREIN THE AGREEMENT, IT IS CLEAR THAT THE INTENTIO N OF THE PARTIES WAS TO SELL THE SUBSIDIARY COMPANY I.E., VST NPL TO GGCL AND PURCHASERS INTENTION IS TO PURCHASE THE VST NPL FOR A CONSOLIDATED PRICE, WHICH IS NOTHING BUT SLUMP PURCHASE PRICE. THE TERMS OF AGREEMEN T ARE VERY SPECIFIC AND CLEAR AND THERE IS NO NEED FOR IMPORTING A NY OTHER MEANING. THE ASSETS AND LIABILITIES OF VST NPL WERE SOLD TOGETHER AS A GROUP BY THE AGREEMENT CITED SUPRA AND THIS SALE SQUARELY FELL IN LINE WITH THE IDEA OF A SLUMP SALE AS PROVIDED IN THE PROVISIONS OF SEC. 50B OF THE ACT. FURTHER, ASSESSEE SOLD THE ENTIRE UNDERTAKING WITH ALL I TS ASSETS AND LIABILITIES TOGETHER WITH AL LICENCES, PERMITS, APPROVAL S, REGISTRATION, CONTRACTS, EMPLOYEES AND OTHER CONTINGENT LIABILITIES ALS O FOR A SLUMP PRICE. THIS KIND OF SALE FALLS UNDER THE PURVIEW OF SE C.50B. IN OUR OPINION, THE PROVISIONS OF SEC.50B ARE APPLICABLE AND WE ARE OF THE OPINION THAT THE DIRECTION GIVEN BY THE CIT(A) TO COM PUTE THE CAPITAL GAIN AS PER SEC.50B IS IN ACCORDANCE WITH LAW AND CALLS FO R NO INTERFERENCE FROM US. THE SAME IS CONFIRMED. 8. THE SECOND GROUND OF APPEAL IS WITH REGARD TO DISAL LOWANCE OF THE CLAIM OF THE ASSESSEE OF BAD DEBTS/DEDUCTION U/S 37 (1) IN RESPECT OF AMOUNTS NOT RECOVERABLE FROM THE SUBSIDIARY COMPANY I .E VST NPL AND WRITTEN OFF IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE CON SISTS OF ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 9 MONEY ADVANCED TO THE SUBSIDIARY COMPANY AT RS.17,88,50, 501, SALARY, SECONDMENT CHARGES AND OTHER EXPENSES INCURRED BY THE ASSESSE E ON BEHALF OF THE SUBSIDIARY COMPANY AT RS.2,84,85,440 AND MONEY RECEIVABLE TOWARDS SALE OF AGRONOMY AND MARKETING RIGH TS AT RS.6,50,00,000 AGGREGATING TO RS.27,23,35,941. 9. WITH REGARD TO THE ABOVE GROUND, THE LEARNED COUN SEL FOR THE ASSESSEE SUBMITTED THAT VST HAD DIVERSIFIED INTO THE BUSIN ESS OF NATURAL PRODUCTS LIKE PAPRIKA, OLEORESIN ETC. IN 1992 CONSIDERING ENORMOUS EXPORT POTENTIAL OF AGRI-PRODUCTS AND ALSO TO TAKE AD VANTAGE OF IT STRENGTHS IN WORKING TOGETHER WITH THE FARMER COMMUNIT Y. INITIALLY, VST WAS MAINLY INVOLVED IN TRADING OF AGRI-PRODUCTS LIKE GHERKINS AND PAPRIKA IN THE EXPORT MARKET. SUBSEQUENTLY, VST PRO MOTED A 100% SUBSIDIARY NAMED VST AGROTECH LTD. WHICH WAS SUBSEQUENTLY RENAMED AS VST NATURAL PRODUCTS LIMITED (NPL) A 100% EXPORT OR IENTED UNIT FOR CARRYING ON THE BUSINESS OF PROCESSING VALUE ADDED HORTICUL TURAL PRODUCTS. THESE HORTICULTURE PRODUCTS INCLUDED GHERKINS BOTH IN BULK AND BOTTLED FORM, DEHYDRATED PRODUCTS, SPICES POWER, OLEORESINS ETC. HE SUBMITTED THAT THIS CONSTITUTES ALL TOGETHER A NEW LI NE OF BUSINESS IN WHICH THE COMPANY DID NOT HAVE PRIOR EXPERIENCE AND WA S MAINLY DEPENDENT ON THE HIGHLY DEMANDING EXPORT MARKET AS T HERE WAS NO READY MARKET IN INDIA FOR SUCH PRODUCTS AND THE MADE IN INDIA PRODUCT NOT EASILY ACCEPTABLE TO THE FOREIGN BUYER AND HAD TO GO THROUGH STRINGENT PROCESS OF PRODUCT ACCEPTANCE. FOR THE ABOVE AND VARIOUS OTHER REASONS THE BUSINESS OF NPL DID NOT SUCCEED AND THE A MOUNTS FINANCED TO NPL BY THE COMPANY COULD NOT BE RECOVERED DUE TO ITS MOUNTING LOSSES. THE COMPANY AS A MATTER OF PRUDENCE HAD , IN THE FINANCIAL YEAR 1998-99 RELEVANT TO THE AY 1999-2000 , PROVIDED RS.53 CRORES TOWARDS LOSS FROM NPL COVERING THE AGGREGATE OF INVESTMENTS, FIXED ASSETS AND MONIES ADVANCED BUT UNRECOVERABLE. SUCH LOSS WAS ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 10 TAKEN AS A DISALLOWANCE IN COMPUTATION OF TOTAL INCOME AS THE AMOUNTS WERE MERE PROVISIONS AND NOT ACTUALLY WRITTEN OFF IN T HE BOOKS. IN THE FINANCIAL YEAR 1999-2000 (AY 2000-01), THE MONIES DU E FROM NPL WERE ACTUALLY WRITTEN OFF IN THE BOOKS AND HENCE CLAIMED AS DEDUCTION IN COMPUTATION OF TOTAL INCOME FOR THAT YEAR. THIS IS ALSO EVIDENT FROM THE AUDITED ACCOUNTS FOR THAT YEAR WHERE SUB-POINT (II) OF POINT 22-NOTES TO PROFIT AND LOSS ACCOUNTS CLEARLY MENTION THAT THE PROVISI ONS SET UP IN THE PREVIOUS YEAR I.E. FY 1998-99) UNDER THE HEAD CONTIN GENCIES SUBSIDIARY WERE FULLY ADJUSTED. THE ADVANCES MADE TO N PL FROM TIME TO TIE IN ORDER TO HELP THEM TO MEET THEIR CASH FLOW REQ UIREMENTS. IT IS SUBMITTED THAT THESE PAYMENTS HAVE TO BE MADE BY THE A SSESSEE AS AT THAT TIME NPL COULD NOT RAISE FUNDS FROM EITHER CONVENT IONAL SOURCES OR THE FINANCIAL MARKET AND SINCE AS A PARENT COMPANY IT I S OUR RESPONSIBILITY TO ENSURE THE COMMITMENTS OF THE SUBSIDIARY ALSO. THE ASSESSEE WAS HOPEFUL AT THAT TIME THAT THE BUSINESS OF NPL COULD BE REVIVED AND THE AMOUNTS ADVANCED COULD BE RECOVERED. HOW EVER, IN SPITE OF THEIR BEST EFFORTS, DUE TO VARIOUS FACTORS THE B USINESS OF NPL COULD NOT GET REVIVED AND NO PART OF THE AMOUNT ADVA NCED AS ABOVE COULD BE RECOVERED BY IT. HENCE, IT HAS WRITTEN OFF THE ABOVE AMOUNT OF RS.17,88,50,501 AS IRRECOVERABLE AND CLAIMED THE SAME AS DEDUCTION IN COMPUTING THE BUSINESS INCOME. IN THIS REGARD, IT IS SUBMI TTED THAT ANY MONEY ADVANCED DURING THE COURSE OF BUSINESS AND NOT RECOV ERED ALSO CONSTITUTE BUSINESS EXPENDITURE. THE ABOVE AMOUNTS WERE SPENT BY THE ASSESSEE OUT OF BUSINESS OBLIGATION AS A PARENT COMPANY AND WERE REQUIRED BY THE PRINCIPLES OF BUSINESS EXPEDIENCY. IT IS ALSO SUBMITTED THAT THE AMOUNTS WERE REVENUE IN NATURE AND HAVE NO T RESULTED IN ANY ASSET OR RIGHT OR ANY OTHER BENEFIT OF ENDURING NATUR E. IT IS THEREFORE SUBMITTED THAT THE SAME IS ALLOWABLE AS A BUSINESS DEDUCT ION U/S 37(1) OF THE ACT. NPL WAS FORMED BY THE ASSESSEE COMPANY AS A SE PARATE COMPANY IN ORDER TO CARRY ON THE BUSINESS OF MANUFACTURE AND SALE OF ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 11 AGRO BASED PRODUCTS. THE ABOVE SAID COMPANY WAS FORMED AS A 100% SUBSIDIARY SINCE THE DIVERSIFIED NEW BUSINESS REQUIRES INDE PENDENT FOCUS SEPARATELY FROM THE MAIN BUSINESS OF SALE OF CIGARETTE OF THE PARENT COMPANY. THE PROJECT OF NPL WAS BEING IMPLEMENTED WIT H A TECHNOLOGY OBTAINED FROM FOREIGN COMPANIES. EVEN THE WORK OF SUP ERVISION OF THE PROJECT IMPLEMENTATION WAS BEING DONE BY A US COMPANY. THE PROJECT WAS INITIALLY ESTIMATED AT RS.29 CRORES AND TO BE COMPLET ED OVER A PERIOD OF ABOUT ONE YEAR. HOWEVER, THE PROJECT WAS DEL AYED DUE TO VARIOUS REASONS BOTH TECHNICAL AND FINANCIAL WITH THE RE SULT THAT THE PROJECT IMPLEMENTATION GO DELAYED MUCH BEYOND THE ESTI MATED TIE RESULTING IN COST ESCALATION. THE PROJECT ULTIMATELY HAD TO BE SHELVED OFF AFTER THE COST TOUCHED RS.73 CRORES. DURING THE PERIOD WH EN THE PROJECT WAS GETTING DELAYED, VST HAD TO FACE A PECULIAR SITUAT ION OF REQUIRING TO FINANCE MUCH HIGHER AMOUNTS THAN INITIALLY ANTICIPATED . OTHERWISE, EVEN THE EXISTING AMOUNTS ADVANCED WOULD HAVE BEEN LOST . THE PAYMENTS WERE DUE TO BE MADE TO A LARGE NUMBER OF SUPPLIERS AND CREDITORS APART FROM FOREIGN COMPANIES AND HENCE VST HAD NO OPTION OTHER THAN SOMEHOW MAKING THE PAYMENTS. BECAUSE OF THE PROJECT DELAYS AND THE DOUBTS ASSOCIATED WITH THE PROJECT, NO FIN ANCIAL INSTITUTIONS WERE COMING FORWARD TO LEND MONEY TO THE PROJECT, NPL WITH DIFFICULTY MANAGED TO GET ONLY ABOUT RS.7 CRORES AS LONG TERM FUNDING FROM BANKS AND INSTITUTIONS, DURING THE PERIOD WHEN T HE PROJECT WAS GETTING DELAYED AND THE BALANCE OF FINANCES WERE PROVI DED BY VST IN THE FORM OF ADVANCES. IT IS ALSO SUBMITTED THAT VST BEING T HE PARENT COMPANY HAD A RESPONSIBILITY TO FUND AND PAY THE CREDIT ORS OF THE SUBSIDIARY. OTHERWISE NOT ONLY NPLS CREDITORS WOULD HA VE BEEN AFFECTED BUT ALSO THE CREDIBILITY AND FINANCIAL RATING OF VST I TSELF WOULD HAVE BEEN AFFECTED. DURING THE ABOVE PERIOD, THE FINANCIAL MA RKETS WERE ALSO UNDERGOING SERIOUS DOWNTURN AND DEPRESSION AND THEREFO RE NPL COULD NOT RAISE ANY MONEYS FROM PUBLIC OR THROUGH THE FINAN CIAL MARKET. ALSO, ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 12 SINCE THE PROJECT HAD NOT REACHED A BREAK-EVEN POINT, T HE MANAGEMENT DID NOT DEEM IT FIT TO GO FOR A PUBLIC ISSUE THOUGH T HIS WAS VERY MUCH IN THE PLANS. IN VIEW OF THE ABOVE, IT IS SUBMITTED TH AT THE COMBINATION OF THE ABOVE FACTORS HAS NECESSITATED IN VST MAKING THE ADV ANCES TO NPL,WHICH ARE THEREFORE CLEARLY IN THE NATURE OF ADVA NCES MADE IN THE COURSE OF CARRYING ON THE BUSINESS, MADE WITH COMMERCIAL N ECESSITY AND BUSINESS EXPEDIENCY AND HENCE IS ALLOWABLE AS A DEDUCTION U/S 37(1) OF THE ACT. IN THE LIGHT OF THE BAD FINANCIAL POSITION O F NPL COUPLED WITH MOUNTING ONGOING CASH LOSSES AND NON-RECOVERABILITY OF T HE AMOUNTS, NO PURPOSE WOULD HAVE BEEN SERVED BY TAKING UP LEGAL ACTI ON AGAINST THE DEBTOR-COMPANY. THEREFORE, THE COMPANY HAS WRITTEN O FF THESE AMOUNTS AS BAD DEBTS. MOREOVER, BAD DEBT IS A DESCRIPTIO N OF A DEBT, WHICH CANNOT REASONABLY BE EXPECTED TO BE REALIZED. TH ERE IS NO ACID TEST TO ASCERTAIN WHETHER A DEBT HAD BECOME BAD AND DOU BTFUL AND IF SO, AT WHAT POINT OF TIME IT BECAME BAD. THESE ARE QUESTIO NS OF FACT AND BASED ON CIRCUMSTANCES IN WHICH THE ASSESSEE IS DOING HIS BUSI NESS. FURTHER, IT IS UPTO THE ASESSEE TO DEICIDE WHETHER THE D EBT IS BAD OR NOT. IF THE FINANCIAL POSITION OF THE DEBTOR IS SUCH THAT IT WOULD BE FUTILE TO MAKE ATTEMPTS TO RECOVER THE AMOUNT, THE ASSESSEE WOULD BE JUSTIFIED IN WRITING-OFF THE DEBT. FURTHER, WHAT IS REQUIRED I S AN HONEST JUDGEMENT ON THE PART OF THE ASSESSEE AT THE TIME WHEN HE MADE TH E WRITE-OFF IN THE LIGHT OF THE EVENTS UPTO THAT STAGE AND NOT IN T HE LIGHT OF LATER HAPPENINGS. IN FACT, THIS HAS BEEN RECOGNIZED BY THE STATUTE ALSO BY AMENDMENT TO SEC.36(VII) WHERE UNDER MERE WRITE-OFF O F DEBT IS SUFFICIENT AND THERE IS NO REQUIREMENT TO ESTABLISH TH AT THE DEBT HAS BECOME BAD. THEREFORE, THE REQUISITE CONDITION UNDER T HE ACT IS TO WRITE- OFF OF THE DEBT, WHICH WAS COMPLIED WITH. THE ABOVE W OULD BE EVIDENT FROM THE SCHEME OF ENTRIES PASSED IN THE BOOKS OF ACCOUNTS T HAT HAVE BEEN REPRODUCED HEREUNDER ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 13 9.1. THE COMPANY HAS ACTUALLY WRITTEN OFF THE DEBTS A S BAD IN THE BOOKS BY SQUARING OFF THE PROVISION A/C AND THE PARTY A/C AND HENCE CLAIMED AS DEDUCTION IN COMPUTATION OF TOTAL INCOME FOR THAT YEAR. THIS IS ALSO EVIDENT FROM THE AUDITED ACCOUNTS FOR THAT YEAR WHERE SUB-POINT (II) OF POINT 22 NOTES TO PROFIT AND LOSS ACCOUNTS CLEAR LY MENTION THAT THE PROVISIONS SET UP IN THE PREVIOUS YEAR ( I.E FY 199 8-99) UNDER THE HEAD CONTINGENCIES SUBSIDIARY WERE FULLY ADJUSTED, M EANING WRITTEN OFF). 9.2. IT IS SUBMITTED THAT THE AMOUNT WRITTEN OFF SAT ISFIES THE REQUIREMENTS OF SEC.36((1)(VII) AND HENCE ARE ELIGIBLE TO BE ALLOWED AS BAD DEBT. THEREFORE, IT IS REQUESTED TO ALLOW THE A MOUNT OF RS.14,09,13,424 AS BAD DEBT. 9.3. IN RESPECT OF ITEM NON-RECOVERY OF MONIES FROM N PL ON SALE OF AGRONOMY & MARKETING RIGHTS CONSIDERED AS INCOME IN E ARLIER YEARS WRITTEN OFF AS IRRECOVERABLE AND CLAIMED U/S 36(1)(VI)/ 37(1) RS.6,50,00,000- IT IS SUBMITTED THAT THE COMPANY HAD SPE NT CONSIDERABLE TIME AND EFFORT IN DEVELOPING THE INFRAST RUCTURE AND THE KNOW-HOW BOTH ON AGRICULTURAL AND MARKETING ASPECTS OF THE BUSINESS INCLUDING AGRONOMY FOR DEVELOPING SUITABLE VARIETIES O F SPICES AND VEGETABLES THAT WERE REQUIRED BY NPL TO CARRY ON THE IR BUSINESS OPERATIONS. ALL SUCH EXPERTISE AND RIGHTS WERE SOLD AS A GRONOMY AND MARKETING RIGHTS TO NPL IN THE PREVIOUS YEAR RELEVAN T TO THE ASSESSMENT YEAR 1997-98 FOR A CONSIDERATION OF RS.6.50 CRORES. TH E RESULTANT CAPITAL GAINS WAS OFFERED BY THE ASSESSEE TO TAX IN THE AY 1997-98, HOWEVER NO PART OF THE ABOVE CONSIDERATION FOR SALE OF AGRONOMY AND MARKETING RIGHTS COULD BE RECOVERED BY THE ASSESSEE FROM N PL DUE TO THEIR ADVERSE BUSINESS CIRCUMSTANCES. THEREFORE, THE AMOUNT UNDER CONSIDERATION WAS WRITTEN OFF AS NOT RECOVERABLE, DURIN G THE PREVIOUS ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 14 YEAR RELEVANT TO THE AY 2000-01. IT IS SUBMITTED THA T THE ABOVE AMOUNT SATISFIES THE REQUIREMENTS OF SEC.36(1)(VII) AND HENCE ALL OWABLE AS A BAD DEBT. FURTHER, THE AMOUNT BEING NON RECOVERY OF A B USINESS DEBT, INCURRED DURING THE COURSE OF BUSINESS AND NOT BEING A CAP ITAL EXPENDITURE IN NATURE IS ALSO ALLOWABLE AS A DEDUCTION U/S 37(1) OF THE ACT. IT IS FURTHER SUBMITTED THAT IN RESPECT OF THE ABO VE THREE DEDUCTIONS, THE ASSESSEE COMPANY HAS GENUINELY INCURRED L OSSES AND HAS NOT BEEN ABLE TO RECOVER THE ADVANCES MADE ON THE SA LE OF PROCEEDS IN RESPECT OF SALE OF GOODS AND SERVICES WHICH CONSTITUTES A BUSINESS LOSS. THEREFORE, THEY ARE ALLOWABLE AS A DEDUCTION WH ILE COMPUTING INCOME FOR THE BUSINESS. THEREFORE, IT IS REQUESTED TO K INDLY ALLOW THE DEDUCTION AS CLAIMED BY THE ASSESSEE IN ITS RETURN OF INCOM E. THE ASSESSING OFFICER HELD THAT THE ENTIRE EXERCISE OF WRITING OFF OF AMOUNTS DUE FROM NPL HAD BEEN CARRIED OUT IN THE LIGHT OF AG REEMENT ENTERED INTO BY THE ASSESSEE COMPANY WITH M/S GGCL VIDE AGREEMENT DT.23-11- 99 FOR SALE OF SHARES IN NPL. THE ASSESSING OFFICER THEREF ORE CONCLUDED THAT IN SUCH CIRCUMSTANCES, THE AMOUNTS DUE TO THE ASSESSEE CO MPANY FROM VST NPL CANNOT BE BIFURCATED AND CONSIDERED INDEPE NDENTLY, BUT SHOULD BE TREATED AS A CAPITAL LOSS INCURRED IN THE PACKA GE DEAL FOR WHICH THE ASSESSEE COMPANY RECEIVED A CONSIDERATION OF RS.15.50 CRO RES FROM M/S GGCL. THE ASSESSING OFFICER THEREFORE DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION OF THE AMOUNTS WRITTEN OFF EITHER U/S 36(1)(VII) OR U/S 37(1) AND CONCLUDED THAT SUCH CAPITAL LOSS IS NOT AL LOWABLE AS A DEDUCTION. . HE RELIED ON THE FOLLOWING JUDGEMENTS: I)TURNER MORRISON & CO.,LTD., V. CIT 245 ITR 724 (KO L) WHEREIN IT WAS HELD THAT THE ASSESSEE ADVANCED THE MONEY TO ITS SUBSIDIARY COMPANY AND THIS COMPANY WAS WOUND UP BECAUSE ITS ASSETS WERE PURCH ASED BY A COMPANY WHOLLY OWNED BY GOVERNMENT OF INDIA AND THE ENTIRE AMOUNT WENT TO THE SECURED CREDITOR. AS A RESULT, THERE WAS NO CHANCE OF ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 15 RECOVERY OF THE AMOUNT FROM THE SUBSIDIARY. IT WAS IM MATERIAL WHETHER THE BAD DEBT WAS SHOWN AFTER THE CLOSE OF THE ACCOUNTI NG YEAR OR DURING THE ACCOUNTING YEAR ITSELF. BAD DEBT WAS ALLOWABLE AS A DEDUCTION IN COMPUTING THE INCOME EVEN IF THE BAD DEBT CAME INTO EX ISTENCE BECAUSE OF THE EXPENDITURE INCURRED FOR ADVANCING MONEY TO A SUBSIDIARY COMPANY OF THE ASSESSEE COMPANY. SINCE THE ASSESSEE HAD NO CHANCE OF RECOVERING THE AMOUNT, THE AMOUNT IN QUESTION FROM THE SUBSIDIARY, THE AMOUNT COULD BE TREATED AS A BAD DEBT ENTITLED TO DEDUCTION FROM THE INCOME OF THE RELEVANT ASSESSMENT YEAR. II) CIT V. AMALGAMATION PVT.LTD. 226 ITR 188 (SC) WHEREIN IT WAS HELD THAT THE ASSESSEE COMPANY HAD INCURRED THE LOSS IN CARRYING ON IS OWN BUSINESS WHICH INCLUDED FURNISHING GUARANTEES TO DEBTS BOR ROWED BY ITS SUBSIDIARY COMPANIES. THE ASSESEE COMPANY COULD HAVE ASCERTAI NED WHETHER THERE WAS LOSS IN THE TRANSACTION OF GUARANTEE ONLY AT THE STAGE OF FINAL PAYMENT BY THE LIQUIDATORS, WHICH WAS RECEIVED IN THE RELEVANT PREVIOUS YEAR 1962-63 AND IT WAS ALLOWABLE IN THAT YE AR. III) ITC LTD. V. JCIT 95 TTJ 1017 (KOL), WHEREIN IT WAS HELD THAT EXPENSES INCURRED BY ASSESSEE COMPANY ON RESTRUCTURING THE BUSINESS OF A GROUP COMPANY (BY MERGER WITH ANOTHER COMPANY) WITH A VIEW TO PROTECT ITS BRAND NAME ASSOCIATED WITH THAT COMPANY AND ITS GOODWI LL, WAS EXPENDITURE LAID OUT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS AND IS, THEREFORE, ALLOWABLE AS DEDUCTION. IV) DCIT V. OMAN INTERNATIONAL BANK SAOG 100 ITD 285 (SB) (MUM), WHEREIN IT WAS HELD THAT AFTER AMENDMENT OF SEC.36(1)( VII) WITH EFFECT FROM 1-4-1989, ONCE THE ASSESSEE WRITTEN OFF THE DEBT AS BAD DEBT THERE IS NO OBLIGATION ON THE PART OF THE ASSESSEE TO PROVE T HAT THE DEBT ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 16 WRITTEN OFF IS INDEED A BAD DEBT FOR THE PURPOSE OF ALLOWANCE UNDER SEC.36(1)(VII). 10. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REP RESENTATIVE SUBMITTED THAT THE ABOVE AMOUNT WRITTEN OFF IS NOT I N REVENUE FIELD. IT IS NOT A TRADE ADVANCE. THE ASSESSEE IS NOT IN MONEY LENDIN G BUSINESS. IT IS A CAPITAL ADVANCE. THE QUESTION OF DIMINUTION OF G OODWILL OF THE ASSESEE OR THE CREDIBILITY OF THE ASSESEE HAS NOTHING TO DO WITH THE ALLOWING OF THE BAD DEBT. LOSS OF CAPITAL ASSET CANNOT B E ALLOWED AS BAD DEBT UNDER THE PROVISIONS OF SEC. 36(2). SHE SUBMITTED T HAT THE CLAIM OF BAD DEBTS FOR AN AMOUNT OF RS.6,50,00,000 BEING MONE Y RECEIVABLE TOWARDS SALE OF AGRONOMY AND MARKETING RIGHTS, IS NOT COVERED U/S 36(2)(I) AND THE CONTENTION OF THE AUTHORISED REPRESE NTATIVE OF THE ASSESSEE THAT TO ALLOW A DEDUCTION AS BAD DEBT, IT REQU IRES ONLY THAT DEBT SHOULD HAVE BEEN TAKEN INTO ACCOUNT IN COMPUTING THE INCOME OF THE ASSESSEE AND NOT IN THE COMPUTATION OF CAPITAL GAIN IN AN EARLIER YEAR, THE BAD DEBT IS TO BE ALLOWED AS A DEDUCTION U/S 36(1). SHE SUBMITTED THAT THIS ARGUMENT OF THE ASSESSEES COUNSEL IS D EVOID OF ANY MERIT SINCE AS PER CHAPTER IV OF THE INCOME TAX ACT, WH ICH DEALS WITH THE COMPUTATION OF INCOME, IS DIVIDED INTO FIVE PARTS, EACH PART DEALING EXCLUSIVELY WITH ONLY ONE HEAD OF INCOME AND FORMING I NDEPENDENT CODES AS FAR AS EACH SEPARATE HEAD OF INCOME IS CONCERNED. THERE IS NO SCOPE OF IMPORTING PROVISIONS OF ONE HEAD OF INCOME INTO ANOTHER HEAD WHILE COMPUTING THE INCOME UNDER ANOTHER HEAD UNDER T HIS CHAPTER. THIS COMPARTMENTALIZATION OF HEADS IS DONE AWAY WITH ON LY UNDER CHAPTER VI WHICH PROVIDES FOR AGGREGATION AND SET OFF OF THE VARIOUS HEADS OF INCOME. THE REFERENCE TO THE COMPUTATION OF INCOME UNDER SEC.36(2) MUST, THEREFORE, BE READ IN THE CONTEXT IN WH ICH IT HAS BEEN USED. A HARMONIOUS CONSTRUCTION OF THE PROVISIONS OF THE ACT CAN ONLY LEAD TO THE CONCLUSION THAT INCOME OR LOSS OTHER THAN PR OFITS AND GAINS OF ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 17 BUSINESS CANNOT BE IMPORTED INTO COMPUTATION OF DEDUCTION U/S 36(1)(VII) READ WITH SEC.36(2)(I). IF THE INTERPRETA TION GIVEN BY THE ASSESSEE WERE TO BE ADOPTED, IT WOULD LEAD TO A SITUATIO N OF DISCRIMINATION IN FAVOUR OF A CLASS OF ASSESSEE HAVING INCOME UNDER THE HEAD, PROFIT AND GAINS. SINCE THERE IS NO PROVISION CO MPARABLE TO SEC.36(1)(VII) UNDER ANY HEAD OTHER THAN PROFITS AND G AINS, AN ASSESSEE HAVING INCOME FROM THE HEAD OTHER THAN PROFITS AND GA INS CAN NEVER BE IN A POSITION TO CLAIM SUCH BAD DEBTS. THIS CONFER UNFAI R ADVANTAGE ON ASSESSEES ENGAGED IN BUSINESS AND PROFESSION. THIS CANNOT BE T HE INTENTION OF THE ACT. FURTHER, SHE RELIED ON THE O RDER OF THE TRIBUNAL IN THE CASE OF D.C.M. LTD.,V. DCIT, 123 TTJ 114 (DEL) FO R THE PROPOSITION THAT WHEN THE ASSESSEE IS NOT IN THE BUSINESS OF ADVANCING THE LOAN, THE MONEY ADVANCED TO ITS SUBSIDIARY IS NOT IN LINE WITH THE NORMAL BUSINESS ACTIVITIES OF THE ASSESSEE. THEREFORE, THE LOAN GIVEN T O SUBSIDIARIES IS NOT CONNECTED TO THE BUSINESS OF THE ASSESSEE. THUS, THE AM OUNT OF LOAN GIVEN TO A SUBSIDIARY CANNOT BE TERMED AS MONEY AD VANCED DURING THE COURSE OF NORMAL BUSINESS ACTIVITY OF ASSESSEE AND THERE AFTER WHEN THERE WAS NO RECOVERY AND LOSS OF THAT AMOUNT, IS NOTH ING BUT LOSS OF CAPITAL AND THE CLAIM OF THE ASSESSEE OF THAT AMOUNT AS A DEDUCTION CANNOT BE BUSINESS LOSS U/S 28 READ WITHSEC.37. FURTHER, SHE RELIED UPON THE JUDGEMENT OF THE BOMBAY HIGH COURT IN THE CA SE OF SALEM MANGNESITE PVT.LTD. V. CIT 180 TAXMAN 545 (BOM) FOR THE PROPOSITION THAT THE ASSESSEE WHICH IS SOLELY IN THE BUSINESS OF MINING, HAD LENT CERTAIN AMOUNT TO ITS WHOLLY OWNED SUBSIDIARY COMPANY FO R CONSTRUCTION OF A JETTY, SUBSEQUENTLY, SUBSIDIARY COMPANY SUFFERED A LOSS AND WAS NOT IN A POSITION TO REPAY THE SAID LOAN. THEREFORE, ASSE SSEE ACCEPTED A SMALL AMOUNT IN FULL AND FINAL SETTLEMENT OF SAID LOAN AND WROTE OFF THE REMAINING AMOUNT. IT CLAIMED DEDUCTION OF THAT AMOUN T WRITTEN OFF ON GROUND THAT IT WAS LOSS INCIDENTAL TO ITS BUSINESS. THE SAI D LOAN AMOUNT GRANTED TO SUBSIDIARY COMPANY DID NOT SPRING DIRECTLY F ROM THE BUSINESS ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 18 OF ASSESSEE COMPANY AND NOT INCIDENTAL TO ITS BUSINESS ACTIV ITY. THE AMOUNT WRITTEN OFF CANNOT BE ALLOWED AS DEDUCTION U/S 2 8 OF THE ACT. 11. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. TO CLAIM DEBT AS BAD DEBT AND AS A DEDUCTION, T HE DEBT SHOULD BE IN RESPECT OF BUSINESS, WHICH IS CARRIED ON BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR, SHOULD HAVE BEEN TAKEN INTO ACCO UNT IN COMPUTING THE INCOME OF THE ASSESSEE FOR THE ACCOUNTING YEA R OR SHOULD REPRESENT MONEY LENT IN ORDINARY COURSE OF ITS BUSINESS O F BANKING OR MONEY LENDING. THE AMOUNT SHOULD BE WRITTEN OFF AS I RRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THAT ACCOUNTING YEAR IN WH ICH THE CLAIM FOR DEDUCTION IS MADE FOR THE FIRST TIME. THE ASSESSEE CAN CLAIM DEBT AS BAD DEBT, IN RESPECT OF DEBT WHICH WOULD HAVE COME INT O THE BALANCE SHEET AS A TRADING DEBT. THE DEBT MEANS SOMETHING MORE THAN A MERE ADVANCE. IT MEANS SOMETHING WHICH IS RELATED TO BUSINESS OF THE ASSESSEE. THE AMOUNT IS GIVEN AS A TRADING DEBT SINCE INCE PTION AND THE CHARACTER OF SUCH AMOUNT IS NOT CHANGED BY ANY ACT OF THE ASSESSEE OR BY OPERATION OF LAW, THEN SUCH LOAN CONSTITUTES AS A TRAD E DEBT. IN OTHER WORDS, DEBT EMERGES OR SPRINGS FROM THE TRADING ACTIVI TY IN THE COURSE OF ORDINARY BUSINESS OF THE ASSESSEE, WHICH CAN BE CLAIMED AS B AD DEBT. THE DEBT ARISING OUT OF CAPITAL FIELD OR EMERGING FRO M THE INVESTMENT ACTIVITY OF THE ASSESSEE IS NOT A TRADE DEBT. IN THE CAP ITAL FIELD, IT CANNOT BE TREATED AS DEBT IN ORDINARY COURSE OF BUSINESS OR TRAD ING DEBT, EVEN BY UNILATERAL ACTION, THE ASSESSEE TREATED THE DEBT IN T HE CAPITAL FIELD AS TRADE DEBT. IN ORDER TO CLAIM THE ALLOWANCES AS BAD DE BT, THERE SHOULD BE RELATION BETWEEN THE DEBTOR AND CREDITOR FROM THE DATE OF LENDING THE MONEY TILL THE DATE OF WRITE-OFF OF DEBT AS BAD DEBT . THE DEBT ARISING OUT OF INVESTMENT ACTIVITY WHICH IS IN THE CAPITAL FIELD CAN NOT BE ALLOWED AS BAD DEBT AS REVENUE DEDUCTION. TO CLAIM BAD DEBT THE BUSINESS IN RESPECT OF WHICH SUCH DEBT HAS BEEN GIVEN MUST CONTINUE TO EXIST IN THE ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 19 YEAR FOR WHICH THE BAD DEBT IS CLAIMED. AS STATED EAR LIER, TO CLAIM DEDUCTION AS A BAD DEBT, IT SHOULD NOT BE TOO REMOTE F ROM THE BUSINESS CARRIED ON BY THE ASSESSEE AND IF THE DEBT OR GUARANTEE GIVEN BY THE COMPANY WHILE CARRYING ON THE BUSINESS OTHER THAN FINANCE TO THE SUBSIDIARY COMPANY, IT IS NOT GIVEN IN THE COURSE OF ASSESSEE S BUSINESS AS THERE IS NO PRIVITY OF THE CONTRACT OR ANY LEGAL REL ATIONSHIP BETWEEN THE ASSESSEE AND SUCH SUBSIDIARY COMPANY AS TRADE DEBTOR AND CREDITOR. THERE IS NEITHER ANY CUSTOM NOR ANY STATUTORY PROVISION OR ANY CONTRACTUAL OBLIGATION UNDER WHICH THE ASSESSEE WAS BOUND T O ADVANCE LOAN TO THE SUBSIDIARY COMPANY. HENCE, THE AMOUNT THAT HAD TO BE LOST OR INCURRED ON ACCOUNT OF SUBSIDIARY COMPANY CANNOT BE CLA IMED AS BAD DEBT WHEN IT BECAME IRRECOVERABLE. IN ORDER TO BE DE DUCTIBLE AS A BUSINESS LOSS, IT MUST BE IN THE NATURE OF TRADING LOSS, NOT AS CAPITAL LOSS SPRINGING DIRECTLY OUT OF TRADING ACTIVITY AND IT MUST BE INCIDENTAL TO THE BUSINESS OF THE ASSESSEE AND IT IS NOT SUFFICIENT THAT IT FAL LS ON THE ASSESSEE IN SOME OTHER CAPACITY OR IS MERELY CONNECTED WITH I TS BUSINESS. BECAUSE THE ASSESSEE BORE THE LOSS OF THE SUBSIDIARY COMPANY ON ACCOUNT OF FAILURE OF THE SUBSIDIARY COMPANY TO REPAY THE SAME, THAT ITSELF CANNOT BE THE REASON OF DEBT AS BAD DEBT. IN O RDER THAT A LOSS MIGHT BE DEDUCTIBLE IT MUST BE A LOSS IN THE BUSINESS OF THE ASSESSEE AND NOT A PAYMENT RELATING TO THE BUSINESS OF SOMEBODY ELSE WHICH UNDER THE PROVISIONS OF THE ACT WAS DEEMED TO BE AND BECAME THE LIABILITY OF THE ASSESEE. LOSSES ALLOWABLE IF IT SPRANG D IRECTLY AND WAS INCIDENTAL TO BUSINESS OF THE ASSESSEE, LOSS WHICH ASSESSEE HAD I NCURRED WAS NOT IN ITS OWN BUSINESS AND IT CANNOT BE DEDUCTED IN R ESPECT OF THE BUSINESS OF THE ASSESSEE FROM ITS PROFITS. THE AMOUNT INCU RRED BY THE ASSESSEE WHICH IS NOT IN THE ORDINARY COURSE OF BUSINESS CANNOT BE ALLOWED AS A DEDUCTION. FURTHER, A DEBT CAN BE INCIDE NT TO BUSINESS ONLY IF IT ARISES OUT OF TRANSACTION, WHICH WAS NECESSARY IN FUR THERANCE OF THE BUSINESS AND WAS WITHIN THE RANGE OF BUSINESS ACTIVITY OF ASSESSEE. ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 20 EVERYTHING ASSOCIATED OR CONNECTED WITH THE BUSINESS CANNOT BE SAID INCIDENTAL THERETO. NOT MERELY SHOULD THERE BE A CLOSE PROXIMITY TO THE BUSINESS, AS SUCH, BUT IT SHOULD ALSO BE AN INTEGRAL AD ES SENTIAL PART OF THE CARRYING ON THE BUSINESS OF THE ASSESSEE. WE SHOULD SEE WHETHER THE TRANSACTION IS NECESSARY PART OF THE NORMAL COURSE OF B USINESS AND ALSO IS CLOSELY INTERLINKED WITH THE ASSESSEES BUSINESS AS INCI DENTAL TO CARRYING ON THE BUSINESS OF THE ASSESSEE. THE MERE OBJECT IN THE MEMORANDUM OF ASSOCIATION OF THE COMPANY IS NOT CONCLUSIVE AS TO THE REAL NATURE OF A TRANSACTION AND THAT NATURE NOT ONLY HAS TO BE DEDUCED FROM THE MEMORANDUM BUT ALSO FRO THE CIRCUMSTANCES IN WH ICH THE TRANSACTION TOOK PLACE. IF THE AMOUNT WAS INCURRED FOR E NSURING ANY INVESTMENT WHICH IS VERY SOURCE OF ITS BUSINESS AND THAT AD VANCE IS NOT INCIDENTAL TO THE TRADING ACTIVITY OF THE ASSESSEE, THE SAME IS NOT ALLOWABLE AS DEDUCTION. THE ADVANCE IN THE FIELD OF INVESTMENT FOR THE PURPOSE OF SECURING SOURCE OF INCOME AND NOT FOR THE PURP OSE OF EARNING INCOME DOES NOT QUALIFY FOR DEDUCTION AS BAD DEBT. IN ORDER TO ENTITLE FOR DEDUCTION IT SHOULD HAVE BEEN INCURRED IN THE COUR SE OF CARRYING ON THE BUSINESS AND IT SHOULD BE IN THE NATURE OF REVENU E. IN THE PRESENT CASE, DEBT CLAIMED AS BAD DEBT IS NOT A TRADING DEBT EME RGING FROM THE TRADING ACTIVITY OF THE ASSESSEE. THE DEBT ARISES OUT OF INVESTMENT ACTIVITIES OF THE ASSESSEE OR ASSOCIATED WITH THE CAPITAL FIE LD, NOT ON ACCOUNT OF REVENUE CANNOT BE ALLOWED AS A BAD DEBT. TH E ASSESSEE COMPANY NEITHER A BANKER NOR A MONEY LENDER, THE ADV ANCE MADE BY THE ASSESSEE AS AN INVESTMENT NOT TO BE SAID TO BE INCIDENT AL TO THE TRADING ACTIVITY OF THE ASSESSEE AND MERELY MONEY HANDED OVER TO SOMEONE IN THE CAPITAL FIELD AND THAT PERSON FAILED TO RETURN THE SAME, THAT AMOUNT CANNOT BE CLAIMED AS DEDUCTION AS BAD DEBT. ACCORDINGLY, MONEY ADVANCED TO SUBSIDIARY COMPANY CANNOT BE ALLOWED A S DEDUCTION EITHER U/S 36(2) OR U/S 37(1) ON WRITING OFF THE SAME. THE HONBLE SUPREME COURT IN THE CASE OF A.V. THOMAS & COMPANY LTD. VS. CIT ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 21 (48 ITR 67) (SC ) IT WAS HELD THAT WHEN THE ASSESSEE IS NEITHER A BANKER NOR A MONEY LENDER, THE ADVANCE MADE BY ASSESSEE TO A PRIVATE COMPANY TO PURCHASE A SHARE COULD NOT BE SAID TO BE INCIDE NTAL TO THE TRADING ACTIVITY OF THE ASSESSEE. IN THE CASE OF B.D. BHARUCHA VS. CIT (1967) 65 ITR 403 (SC) IT WAS HELD THAT IF AN ADVANCE MADE IN THE ORDINARY COURSE OF BUSINESS OF THE ASSESSEE AS A PART OF THE BUSINESS ACTIVITY THAT DEBT EMERGES FROM THAT ACTIVITY CAN BE AL LOWED AS A BAD DEBT AND TREATED AS A REVENUE LOSS. IF THE AMOUNT WAS INCURRED FOR ENSURING ANY INVESTMENT WHICH IS VERY SOURCE OF HIS BUSI NESS AND THAT ADVANCE IS NOT INCIDENTAL TO THE TRADING ACTIVITY OF T HE ASSESSEE. THE ADVANCE IN THE FIELD OF INVESTMENT MADE FOR THE PURPO SE OF SECURING SOURCE OF INCOME AND NOT FOR THE PURPOSE OF EARNING INCO ME IS NOT ENTITLED FOR ANY DEDUCTION. IN OTHER WORDS, THE SOURCE OF INCOME IS NOT SYNONYMOUS TO THE INCOME. IN ORDER TO ENTITLE DEDUCTIO N IT SHOULD HAVE BEEN INCURRED IN THE COURSE OF CARRYING ON THE BUSINESS AN D IT SHOULD BE IN THE NATURE OF REVENUE LOSS. IN THE PRESENT CASE, DEB T CLAIMED AS BAD DEBT IS NOT A TRADING DEBT EMERGED FROM THE TRADING ACTIVITY OF THE ASSESSEE. THE DEBT ARISES OUT OF INVESTMENT ACTIVITIES OF THE ASSESSEE AND THAT IS IN THE CAPITAL FIELD, NOT ON ACCOUNT OF RE VENUE, CANNOT BE ALLOWED AS A BAD DEBT. RELIANCE ALSO PLACED ON THE JUD GEMENT OF SUPREME COURT IN THE CASE OF ALUMINIUM COMPANY LTD. VS. CIT (1971) (79 ITR 514) (SC), CIT VS. ABDULLABHAI ABDU LKADAR (1961) (41 ITR 545 ) (SC). IN VIEW OF THESE JUDGEMENTS OF THE SUPREME COURT, WE HAVE NOT CONSIDERED THE VARIOUS JUDG EMENTS CITED BY THE ASSESSEES COUNSEL. 12. REGARDING WRITE OFF OF THE SECONDMENT CHARGES AN D OTHER EXPENSES, THIS AMOUNT IS ADVANCED TO THE SUBSIDIARY COMPANY FOR MAKING EXPENSES LIKE SALARY AND SECONDMENT CHARGES, EXPENSE S INCURRED ON BEHALF OF THE SUBSIDIARY COMPANY AND OTHER EXPENSES. THESE ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 22 AMOUNTS ARE ADVANCED TO SUBSIDIARY COMPANY FOR THE PURPO SE OF INCURRING THE BUSINESS EXPENSES OF THE SUBSIDIARY COMPANIES AND THE CONSIDERATION FOR THE SALE OF THE SUBSIDIARY COMPANY IS W ORKED OUT AFTER CONSIDERING THE AMOUNT RECEIVABLES. HENCE IT IS PRESUMED T HAT THE AMOUNTS DUE WERE ALREADY CONSIDERED WHILE ARRIVING AT THE SALE PRICE OF THE SUBSIDIARY COMPANY REPRESENTS AN ADVANCE MADE TO THE SUBSIDIARY COMPANY AND NOT AN EXPENDITURE. THEREFORE THE AMO UNT CANNOT BE ALLOWED U/S 36(2) OR 37(1) AS DISCUSSED IN EARLIER PARA. 13. REGARDING IRRECOVERABLE AMOUNT SPENT ON AGRON OMY AND MARKETING RIGHTS, THE ASSESSEE CLAIMED TO HAVE INCURRED T HESE EXPENDITURE IN DEVELOPING CERTAIN VARIETIES OF SPICES AN D VEGETABLES FOR EXPORTS ON BEHALF OF SUBSIDIARY COMPANY. IT IS STATED THAT EXPENDITURE IS ALSO INCURRED FOR DEVELOPING INFRASTRUCTURE AND KNOW HO W. THE EXPENDITURE INCURRED IS VALUED AT RS.6.50 CRORES AS RELA TABLE TO AGRONOMY AND MARKETING RIGHTS. THIS AMOUNT IS CLAIMED AS RECOVERABLE FROM THE SUBSIDIARY COMPANY. THE ASSESSEE COMPANY COMPUTE D LONG TERM CAPITAL GAIN CONSIDERING THIS AMOUNT OF RS.6.50 CRO RES AS THE SALE CONSIDERATION RECEIVABLE ON THE TRANSFER OF AGRONOMY A ND MARKETING RIGHTS. SINCE THE SUBSIDIARY COMPANY IS SOLD, THIS AMOUNT WHICH IS NOT REALIZABLE, IS CLAIMED AS EXPENDITURE. THE ASSESSEE COMP ANY IS MAKING A CLAIM U/S 37(1) AS EXPENDITURE OR U/S 36(2) AS A BAD D EBT. THIS EXPENDITURE CANNOT BE ALLOWABLE UNDER THIS PROVISION WHERE THIS EXPENDITURE IS NOT AN EXPENDITURE INCURRED FOR THE PU RPOSE OF ASSESSEES OWN BUSINESS AND ALSO THIS IS LOSS OF CAPITAL AND CANNOT BE A LLOWED AS A BAD DEBT AS DISCUSSED IN EARLIER PARAS. ACCORDINGLY, TH ESE GROUNDS OF THE APPEAL ARE DISMISSED. ITA NO.691/H/2005 VST INDUSTRIES LTD., HYDERABAD 23 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMISSED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON: 23.7.2 010. SD/- SD/- N.R.S. GANESAN CHANDRA POOJARI JUDICIAL MEMBER ACCOUNTANT MEMBER. DT/- 23S-7-2010. *VNR COPY FORWARDED TO: 1. M/S VST INDUSTRIES LTD., 1-7-1063/1065, AZAMABAD, HYDERABAD-500 020. 2 ACIT, CIRCLE 3(4), HYDERABAD 3. 4 CIT(A)-, VI, HYDERABAD CIT, HYDERABAD. 5. THE D.R., ITAT, HYDERABAD.